Chapter2 PurchasingProc Week 2

PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e
THE PURCHASING
PROCESS
Chapter 2
© 2012 Cengage Learning. All rights reserved. May

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a publically accessible website, in whole or in part. SOUTH-WESTERN CENGAGE LEARNING
The stakeholders - PURCHASING
PROJECT
PROJECT TEAM
“INTERNAL CLIENTS”
PM
SELLER
PURCHASING DEPT
BUYER
Chapter Overview
 Purchasing objectives
 Strategic supply management roles and
responsibilities
 Improving the procure to pay process
 Approval, contract, and purchase order
preparation
 Types of purchases
 Improving the purchasing process

not be scanned, copied or duplicated, or posted to 3
a publically accessible website, in whole or in part. Purchasing & Supply Chain Management, 5e
Roles and Responsibilities
Overall
Goals
Strategic Tactical
Roles Responsibilities

Overall  Supply continuity
Goals 

Manage sourcing process
Supply base management
 Engage stakeholders
 Sourcing strategies
Strategic Tactical

Overall
 Forecast
Goals  Plan requirements
 Requisitioning process
 Sourcing process
 Contract/RFx preparation
 Receipt and inspection
 Invoice settlement &
payment
 Supplier performance
Strategic Tactical

Overall
 Core
competencies Goals
 Demand
management
 Contract
management
 Cost management
 Procurement
strategies
Strategic Tactical

Elements of the Purchasing Process
Identify user
requirements
Evaluate need efficiently

and effectively
Identify suppliers Through Sourcing
Ensure payment occurs

promptly
Ascertain that need was

effectively met
Drive continuous
improvement

Strategic Supply Management Roles
and Responsibilities
 Spend analysis (historical data & correlation analysis)
 Demand management (unit and rate consumption
levels)
 Specifications/statements of work (purchasing x
stakeholders)
 Category management
 Supplier evaluation/selection

Strategic Supply Management Roles
and Responsibilities
 Contract management
 Cost management
 Managing procure to pay process
 Supplier relationship management
 Establish a supply management strategy

Demand Management and
Specifications/SOWs
 Optimizing sourcing strategies
 Proactively setting policies, procedures, and
measurement systems
 Ensuring appropriate levels of capacity in supply base
 Establishing standards
 Restricting supply base to preferred suppliers that
meet risk and compliance requirements
 Reviewing material specifications
 Reviewing and developing statements of work

Contract Management
 How to award contracts
 Competitive bidding
 How many suppliers?
 Negotiation
 Use of cross-functional team?
 Some combination of both
 Supply management has ultimate
responsibility

Contract Management
 Definition
 “A process associated with defining the contract,
defining roles and responsibilities of both parties,
and advising when to modify and ensure
appropriate escalation”
 Need for …
 Accuracy in terms and conditions
 Alignment with category strategy, required service
levels, and periodic audits

Cost Management
 Understand true cost of purchased goods and
services
 Unbundling price paid and various components
over product lifecycle
 Deliver a target cost
 Use of decision-support tools and techniques

Cost Management
 Develop insights to …
 Cost of supporting a process or commodity
 Understand the gap between cost drivers and
assumed business case
 Identify business case
 Total cost of offering a service

Managing the Procure to Pay Process
• Requisitioning
• RFX (i.e., RFI, RFP, RFQ)
Automation
• Contract award
of all
transactional • Orders
activities • Approval
including … • Receipt
• Payment

Supplier Relationship Management
 Day-to-day transactions
 Identification and mitigation of operational
risk and deliverables
 Business continuity planning
 Understanding suppliers’ business challenges
 Identification of opportunities to improve
value and reduce cost

Supplier Relationship Management
 Establishing supplier scorecard metrics and
reviewing progress
 Contract terms and conditions
 Leveraging flow of information between key
internal process owners and suppliers

Procure to Pay Process Map
Internal
Projects Customers Operations
Specific to each project Should fit under organization’s operations
Start End
Approval/
Need Supplier Receive Settle, Pay,
Forecast and Plan Contract/
Clarification/ Identification Material & and Measure
Requirement P.O.
Requisition / Selection Documents Performance
Generation
Supplier
Need
Fulfillment
Enablers: Finance, Legal, Human Resources, Information Technology

Forecast and Plan Requirement
• Components
•
Types of •
Raw materials
Subassemblies
needs • Finished goods
• Services
Ongoing
need vs.
spot buy
Needs Clarification: Requisitioning
Purchase
requisitions Forecasts New product
Reorder point
and/or and customer Stock checks development
system
statements of orders teams
work

Elements of a Purchase Requisition
Description of required material or service
Quantity required
Estimated unit cost
Operating account to be charged
Date of requisition
Date required
Authorized signature

Supplier Identification and Selection
Existing • Familiarity and track record

• List of preferred suppliers
supplier
• Problem of maverick spending

New • Need to identify potential suppliers
• Need to evaluate and qualify
supplier • Negotiate or competitive bidding?

Maverick Spending
 User selects different supplier than supply
management would
 May be acceptable when there is small chance
of risk
 Loss of opportunity to control cost and/or
leverage purchase volume
 Exposes firm to greater risk

Supplier Identification and Selection
Bidding & negotiating
RFx (info, quotation,

proposal)
Specifications or blueprints
Supplier evaluation

When to Use Competitive Bidding
 Volume is sufficiently high

 Specifications or requirements are clear to supplier
 Marketplace is competitive
 Buyers solicit bids only from technically qualified
suppliers that want contract
 Adequate time is available for suppliers to evaluate
RFQ
 Buyer does not have preferred supplier for particular
item

When to Use Negotiation
 Any criteria for competitive bidding are missing

 Purchase requires agreement on wide range of
performance factors other than price
 Buyer requires early supplier involvement

Statement of Work
 Used for procuring services

 Specifies …
 Work to be completed
 When needed
 What type of service provider
required

Statement of Work
A statement of work typically addresses these subjects:
1. Purpose: Why are we doing this project? A purpose statement attempts
to answer this.
2. Scope of Work: This describes the work to be done and specifies the
hardware and software involved.
3. Location of Work: This describes where the work is to be performed,
including the location of hardware and software and where people will
meet to do the work.
4. Period of Performance: This specifies the allowable time for projects,
such as start and finish time, number of hours that can be billed per
week or month, where work is to be performed and anything else that
relates to scheduling.
5. Deliverables Schedule: This part lists and describes what is due and
when.

From Wikipedia,
a publically the free
accessible encyclopedia.
website, Retrieved
in whole or in part. from "http://en.wikipedia.org/w/index.php?title=Statement_of_work&oldid=588487376
Statement of Work
6. Applicable Standards: This describes any industry specific standards that need
to be adhered to in fulfilling the contract.
7. Acceptance Criteria: This specifies how the buyer or receiver of goods will
determine if the product or service is acceptable, usually with objective criteria.
See Acceptance testing.
8. Requirements: This specifies any special hardware or software, specialised
workforce requirements, such as degrees or certifications for personnel, travel
requirements, and anything else not covered in the contract specifics.
9. Type of Contract/Payment Schedule: The project acceptance will depend on if
the budget available will be enough to cover the work required. Therefore a
breakdown of payments by whether they are up-front or phased will usually be
negotiated in an early stage.
10. Miscellaneous: Many items that are not part of the main negotiations may be
listed because they are important to the project, and overlooking or forgetting
them could pose problems for the project.

From Wikipedia,
a publically the free
accessible encyclopedia.
website, Retrieved
in whole or in part. from "http://en.wikipedia.org/w/index.php?title=Statement_of_work&oldid=588487376
Specifications or Blueprints
 Used for …
 Complex products or services
 Untested or new production processes
 Consists of …
 Detailed blueprints
 Samples
 Technical drawings
 May include use of RFP

Specifications or Blueprints
Guidelines for good requirements
 Use simple direct sentences

 Use a limited vocabulary
 Identify and write down who wants each requirement
(“who” is a stakeholder or group of stakeholders)
 Each requirement should have a single desired result
 Define verifiable criteria
 Every requirement must be verifiable. Often you can indicate a
possible test by adding a simple phrase to qualify a basic
need.
 Determine acceptance criterion/criteria
Ref. Alexander,
a publically I.website,
accessible & Stevens,
in wholeR. Writing
or in part. better requirements, Pearson Education Ltd, ch.7 2002
Evaluate Suppliers
 Evaluation of potential supplier pool

 Pre-qualification of capable suppliers
 Development of selection criteria
 Design supplier evaluation process
 Reverse auctions (or e-auctions)
 Low bids garnered electronically in real-time

Purchase Order
 Quantity  Method of
 Material delivery
specification  Ship-to address
 Quality  P.O. number
requirements  Order due date
 Price  Name and
 Delivery date address of buyer

Receiving Process

Types of Purchases
 Raw materials
 Semi-finished products and components
 Finished products
 Maintenance, repair, and operating (MRO) items
 Production support items
 Services
 Capital equipment
 Transportation and third-party logistics providers


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PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

Evaluate need efficiently

Identify suppliers Through Sourcing

Ensure payment occurs

Ascertain that need was

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

Enablers: Finance, Legal, Human Resources, Information Technology

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

Estimated unit cost

Operating account to be charged

© 2012 Cengage Learning. All rights reserved. May

Existing • Familiarity and track record

• Problem of maverick spending

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

RFx (info, quotation,

© 2012 Cengage Learning. All rights reserved. May

 Volume is sufficiently high

© 2012 Cengage Learning. All rights reserved. May

Bidding & negotiating

 Any criteria for competitive bidding are missing

© 2012 Cengage Learning. All rights reserved. May

 Used for procuring services

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 Use simple direct sentences

 Evaluation of potential supplier pool

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

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